A Guide to the Law of Securitisation in Australia - Clayton Utz

inclusion within the ELE depends on factors such as the ADI’sextent of control over, and integration with the subsidiary as wellas the existence of any third party liabilities of the subsidiary.Generally securitisation vehicles will not form part of the ELE andthe ADI will be subject to limits on exposures to the vehicleunder APS 222 if the vehicle is a related entity of the ADI.7.2 The grant of collateral by Australian ADIsWhen an ADI participates in securitisation structures, it is oftena requirement of the rating agency that the ADI provides, oragrees that it will in the future provide, collateral in support ofits obligations. This is particularly required where the ADI doesnot have the requisite rating commensurate with its role and therating of the relevant securities.The provision of collateral by Australian ADIs as security for theirobligations is a problematic issue. The reason for this is section13A(3) of the Banking Act which replaces the former section16(1). This provides as follows:“If an ADI becomes unable to meet its obligations or suspendspayment, the assets of the ADI in Australia are to be available tomeet that ADI’s deposit liabilities in Australia in priority to allother liabilities of the ADI.”Section 13A(3) is often characterised as prohibiting AustralianADIs from granting security (or collateral). Strictly speaking thisis not correct. An ADI can grant security, but to the extent that itis over the Australian assets of the ADI the effect of section13A(3) is that the security (or collateral) is postponed behind theclaims of the ADI’s depositors.Section 13A(3) therefore is more in the nature of a statutory firstranking security in favour of the ADI’s depositors rather than aprohibition on the ADI granting securities to others.Nevertheless, it is the practice of Australian ADIs not to granta security for the performance of their banking obligations.Section 13A(3) poses difficulties in the context of a ratingagency’s requirement for an ADI to provide collateral. Clearly thiscannot be in the form of a security in the legal sense. Instead,Australian securitisers have developed, in conjunction with therating agency, alternative arrangements which replicate theeconomic (and legal) effects of a security, but which do notinfringe the limitations imposed by section 13A(3). Oneparticular method, which was developed by Clayton Utz, hasbeen approved by APRA. This has been crucial to thedevelopment of the ADI-sponsored securitisation market inAustralia.7.3 Covered bondsCovered bonds are full recourse debt instruments secured by aparticular pool of assets. “Traditional” covered bonds aregenerally issued in certain European countries under specificenabling legislation eg. Pfandbriefe in Germany and ObligationFonciere ‘ in France. In July 2003, HBOS completed its firststructured covered bond issue in the United Kingdom. Thestructured covered bonds issue by HBOS generated interestamong Australian ADIs as a result of the lower costs of fundingassociated with such issues and the access that they give towider and new investor bases.Although APRA’s current prudential standards do not prohibitADIs from issuing covered bonds, APRA has taken the view thatthe issuance of covered bonds by ADIs would be inconsistentwith Australia’s depositor preference regime. Therefore, APRAwill not allow the issuance of covered bonds (or structures withequivalent effect) by ADIs in Australia.7.4 Basel IIAs a general rule, APRA’s prudential standards follow the current1988 Basel Accord to the extent that it is applicable. The 1988Basel Accord has since been revised and a new accord, Basel II,was published in June 2004 and is scheduled for implementationin 2007.APRA will implement Basel II from 2007 and will issue draftprudential standards by early 2005. At the time of writing nodraft prudential standards on Basel II have been issued by APRA.Among some of the changes for securitisation as result of BaseII are:• securitised instruments will no longer be 100 percent riskweighted but will be risk weighted dependent upon theirexternal credit rating. This will encourage greaterinvestment in securitised instruments by ADIs;• the current zero percent risk weighting applied to liquidityfacilities of less than one year will be modified, resulting inan increase in the cost of providing liquidity to conduitsecuritisation vehicles;• the current 50 percent risk weighting that applies toresidential mortgage lending will be reduced to 35 percentunder the standardised Basel II approach thus reducing theregulatory capital requirements for certain ADIs. As such,there may be less incentive for ADIs to securitise theirresidential mortgages;46